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If OPEC deal fails, oil prices may collapse again - analysts

Failure to carry through with the OPEC Vienna deal risks a renewed collapse in oil prices, the US JP Morgan bank said in its Oil Market Weekly report.

During the Vienna meeting held Nov.30, OPEC members decided to implement a new OPEC-14 production target of 32.5 million barrels per day.

The decision was made in order to accelerate the ongoing drawdown of the stock overhang and bring the oil market rebalancing forward.

It was also decided to establish a High-level Monitoring Committee, consisting of oil ministers, and assisted by the OPEC Secretariat, to monitor the implementation of the agreement.

However, JP Morgan analysts believe that Vienna deal could result in a bigger-than-anticipated response from shale producers.

“If OPEC were to deliver on its 32.5 mbd target, then there is additional upside to prices and consequently to non-US, non-OPEC supply estimates, although more noticeably for 2018 than 2017,” said the report.

The analysts expect both Nigeria and Libya, which were exempted from the output cut, to produce more in 2017 than in 2016.

Regarding Indonesia’s decision to suspend its OPEC membership, JP Morgan said that this move reinforces its concerns about tensions within the organization and the challenge of delivering these cuts.

The suspension of Indonesia’s membership in the cartel is a surprise, but so too are reports of the offer by Russia and other non-OPEC producers to cut up to 600,000 barrels per day in a coordinated move, according to the report.

During the Vienna meeting, Saudi Arabia undertook the biggest cut in oil production, as the country agreed to reduce the output volume by 486,000 barrels per day to 10.058 million barrels per day (mbd) from Jan.1, 2017.

The second biggest cut was undertaken by Iraq, which agreed to reduce its oil output by 210,000 barrels per day to 4.351 mbd, UAE – 139,000 bpd to 2.874 mbd, Kuwait – 131,000 bpd to 2.707 mbd.